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Fundamentals of Macroeconomics

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Fundamentals of Macroeconomics
As one begins to understand how the economic world around him is affected by basic events, one must gain a basic knowledge of the basic design of the economy for maximum effectiveness. To facilitate this learning process, this paper will describe some basic terms that are in most discussions surrounding economics. Once there is an understanding of the terms, the description will change to several scenarios, and how the result of a seemingly innocuous event has a ripple effect throughout the economy, affecting households, businesses, and government.

Macroeconomic Terms There are a few very basic terms and concepts that one must understand when embarking on a discussion of macroeconomics. These building blocks will help one to understand why and how the economy works, and what effects of investment decisions, unemployment, and inflation have on the economy.

Gross Domestic Product The Gross Domestic Product (GDP) is the value of goods and services produced in a country during a given year. To calculate GDP, it is necessary to add the total of all consumer spending, government spending, investing and net exports.

Real GDP The Real Gross Domestic Product is the value of goods and services produced in a country for a given year once inflation has been taken into account.

Nominal GDP The Nominal Gross Domestic Product is the value of goods and services produced in a country for a given year using existing prices.

Unemployment Rate The unemployment rate is the percentage of the workforce that is currently not working. However, those that are in this category are willing to work and are currently looking for employment.

Inflation Rate Inflation rate is the rate at which the prices for goods and services is increasing. This value comes from the Consumer Price Index, which is essentially a “basket” of

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